RBC Letter

With two taxation investigations
under way in Canada, there is a natural and widespread interest
in the Dominion's taxation system. No one in the world seems
to have yet worked out a tax plan that would be generally
acceptable. It is impossible to take as standard the intricate
mass of taxes that exists in Canada today.

Taxation starts with the necessity of the State, which exists
because individuals who live together in a society want services
that can be provided only by organization.

Unfortunately, costs of government cannot as a rule be measured
and allocated to individuals, and people are compelled to
accept the services, however good or inefficient they may
be, and to pay the price, whatever charge be made. Since Biblical
times the story of political development, and of the rise
and fall of states, has been inextricably woven with the problem
of the levying of taxes and their use by governments. Eleven
of the first twelve sections in Magna Carta are directly concerned
with taxation. All thinking people in all ages have recognized
that the methods and application of taxation have a tremendous
impact upon production, enterprise, jobs, prosperity and the
growth of civilization. It is possible for a government in
seeking one good, or a good for a certain section of the community,
to lay waste or seriously hamper development that would have
resulted in much greater good for a much greater number.

The father of political economy, Adam Smith, laid down these
canons of taxation: Equality - "the subjects of every state
ought to contribute towards the support of government, as
nearly as possible, in proportion to their respective abilities."
Certainty - "a tax ought to be certain, and not arbitrary."
Convenience - "every tax ought to be levied at the time, or
in the manner most likely to be convenient for the contributor
to pay it." Economy - "every tax ought to be so contrived
as both to take out and to keep out of the hands of the people
as little as possible over and above what it brings into the
public treasury." To these might be added another rule made
desirable by modern developments: all expenses of the state
should be met by direct taxation, lest the invisibility of
taxation should divert public attention from governmental
extravagance.

Efficiency in taxation means more than economy in collection.
In its more important sense it means collection of the necessary
revenue for the greatest good of the citizens with the least
possible burden on the national income. The Royal Commission
on DominionProvincial Relations which presented its
report in 1940 found the Canadian system failing on both counts.
The report referred to "duplicate taxation machinery, inadequate
and divided jurisdiction, and lack of uniformity," all contributing
to unnecessary expense and reduced returns. On the other point,
"the lack of coordination in tax policies, and the almost
uniquely high proportion of the Canadian taxation burden on
costs rather than on profits, reduce the Canadian national
income seriously," through restriction of marginal investment,
production and employment, and through obstruction of the
use of fiscal policy as a stimulant.

It cannot be too much emphasized that the ultimate source
of all revenue is the national income, and the amounts so
used are, of course, not available for the use of the individual
members of society who produce them, or for the expansion
of the means of production. This table, prepared by the Citizens'
Research Institute of Canada shows the relation of governmental
expenditure to national income m four representative years:

Governments

1926

1933

1939

1942

(per cent of
national income)

Dominion

8.07

17.13

16.72

War

40.00

Non-war

7.65

Provincial

2.79

6.98

6.25

4.13

Municipal

6.79

12.38

8.14

5.38

Combined

17.65

36.49

31.11

57.16

This tabulation leads inevitably to consideration of the
cost of government. It has been said often that Canada has
too much government. Certainly there is room for a greater
coordination of government. Too great attention was
given, in the prewar years, to increasing revenue from
taxation, and not enough to seeking means of reducing expenditures
which increase taxation. However, those who believe in economy
in government have a difficult stand to maintain against the
persistence of special interests which seek to attain their
purposes, laudable and Otherwise, through the expenditure
of public money. In the last few generations there has been
a big change in the services rendered by governments, some
of it brought about by growth in population and in wealth;
but the costs of government have outstripped both. Before
the 191418 war the cost of federal government was less
than 8 per cent of the national income; in 1939 it was nearly
17 per cent, and in the postwar years it may well be
25 per cent. Happily, increased wealth carries with it ability
to bear a greater burden of taxation than our forefathers
could have done, but there has never been a time when its
weight pressed so heavily upon economic life.

War has, of necessity, brought taxation to a point that
would have been intolerable in times of peace. Defence of
Canada transcends all private rights, and the feeling is general
that any limitation of war expenditure would be suicidal.
There is not much nicety, in time of war, in deciding where
the money is to come from, but there is no reason why consideration
should not be given to a reasonable adjustment of taxation
at war's end looking toward a reestablishment of industry.
In peacetime, taxation will become again an economic and social
problem, and the wisdom or folly of taxation policies will
govern the whole national progress and development.

Because of its largescale intervention in the economic
life of the country, the Dominion Government finds itself
committed to many responsibilities, and at the same time it
has created a claim for itself to collect the necessary revenue.
Only a nationwide scrutiny can find a solution of the
financial and administrative problems which are so complex
as between the federal, provincial and municipal governments.
If sectionalism or special interests are given their heads,
it will not only prevent the reaching of a sensible answer,
but will defeat the very objectives for which sections and
interests fight.

No Canadians can, from the most selfish viewpoint, contemplate
with unconcern the public or private insolvency of their neighbours.
As investors, they will be adversely affected; as producers,
they will suffer by destruction of markets; as citizens, their
standards will be lowered by admittance of interprovincial
migrants who are less welleducated, less healthy, or
of a substandard labour quality. Another reason that cries
aloud for a rational policy of service and taxation is the
danger to national unity if residents in one province come
to feel that their interests are disregarded by more prosperous
neighbours.

It having been conceded that it is the duty of every citizen
to contribute to the support of the government of his country
in accordance with his ability, it may be postulated that
no measure of that ability is more equitable than his income.
Tax on income can be fair and flexible, whereas sales and
corporation taxes are almost bound to be unfair in their impact,
and depressing on industrial activity. Canada's federal income
tax on individuals, which was introduced largely as a war
measure in 1917, was retained throughout the interwar
years and tremendously increased since this war started. In
the higher brackets of Canadian incomes, the levy is just
short of 100 per cent.

It is interesting to compare the income taxes paid in Canada
and the United States, adjoining countries whose economies
and standards of living are so similar. The following comparison,
made in December by the Financial Post, refers to a married
man with no dependents, and is based upon 1944 payments:

Gross Income

Canada

United States

Percentage by which Canadian
rates are higher

$ 2,000

$ 329

$ 130

153

3,000

732

360

103

5,000

1,628

850

92

10,000

4,262

2,400

78

20,000

10,779

7,035

53

50,000

34,253

27,210

26

100,000

78,687

68,985

14

The New Year message of the Minister of Finance to the people
of Canada carried no hope of reduction in the general field
of taxation in 1945. "It may well be that the New Year will
bring new strains, and demand greater material sacrifices,
than have so far been necessary in Canada," he declared, adding
that he saw no strong hope that governmental expenditures
would be materially lower this year.

Theoretically, taxation should bear in some degree on all
income, but governments are notoriously likely to turn to
the easiest sources, and they must take cognizance of the
fact that there is little use in collecting tax from a small
income with one hand and supplementing that income with the
other hand through social welfare aids. Thus there arises
the cry: "Soak the Rich." This becomes distorted into the
levying of taxes solely to satisfy a demand for redistributing
wealth. It has been going on for a long time: Isocrates, the
philosopher declared in 354 B.C. that persons who made money
were looked upon as criminals, and punished worse than criminals.

Some people single out business, and assert that in peacetime,
no less than in wartime, profits should be confiscated by
the state. But while business can sacrifice, and sacrifice
greatly, for a short time of emergency, continued crippling
of its resources will inevitably lead to stagnation of trade,
the collapse of the national income, and depression. Prosperity
will not come to postwar Canada by putting the brakes
on business.

The development of corporation taxes in Canada has not been
any more carefully planned than any other phase of the taxation
system. As a study of the Citizens' Research Institute said
in 1937, it was for the most part "the outcome of pressure
and following the line of least resistance. Corporations,
in addition to having no souls, had comparatively few votes
and, as the event has shown, few effective friends." The Royal
Commission said of corporation taxes, "the present complexity
is beyond belief; they have grown up in a completely unplanned
and uncoordinated way, and violate every canon of sound
taxation."

Few persons argue that corporations should be freed from
all taxation. They receive certain benefits from the state
in addition to benefits received by individuals, and should
be subject to certain specific taxation in addition to the
taxation paid by their stockholders on dividends. But the
amount should be based on considerations of equity and economic
soundness, taking into consideration the contributions of
taxpaying stockholders and the services which corporations
render to society as employers of labour.

Firms which are struggling to survive may find that taxes
affecting their costs of production compel them to raise their
prices, and sales fall off. They may find that business has
become actually unprofitable, and they will tend to disappear,
while other firms in the same line, which had formerly been
comfortably profitable, in turn become marginal. New enterprises
will be held back from entering a business in which costs
have been raised by taxation and consumption restricted by
high prices. As a result, both labour and capital resources
are thrown out of employment, the national income diminishes,
out of the national income must be found a larger amount than
before to care for the unemployed at public expense, and the
vicious circle is completed by imposition of still more taxes
bearing on costs.

This must not be allowed to happen if Canada is to surmount
the difficulties of postwar reorganization. A maximum
stimulus must be provided to private investment in plant and
equipment, both for reconversion and expansion, because in
these fields lies the hope for fullest employment. Fiscal
policy alone cannot solve the problem of employment, but an
adequate fiscal plan, known to all who must participate in
it, is necessary to help sustain an economy of high employment.
Employers are eager to provide jobs; idle factories do not
make money. But many of the factors which make profitable
operation .possible are not within control of the employers:
taxation, the facilitating of foreign trade, the handling
of foreign exchange, the wisdom of the labour department in
handling labour relations. If these, which are under government
guidance, are so treated as to stimulate business activity
and spur production, then jobs will exist. If these factors
in Canada's economy are not properly handled, then there will
be fewer jobs. Confiscatory taxation is equivalent to seizing
the tools needed for expansion and reconstruction, whereas
Canada is going to need a very large volume of investment
to provide tools and jobs. Those who have the habit of saving
must not be discouraged, for that would indubitably stunt
the growth of capital, and lead to national stagnation. Because,
after all, the only way wealth is created is by saving money
and plowing it back into industry.

Tax reform could make an impressive beginning by wiping
out the double taxation involved in taxing earnings as part
of a corporation's income and then taxing the same earnings
as part of a shareholder's income. It has been done in the
United Kingdom, where the shareholder is given an exemption
in his personal income tax on dividend payments which already
have paid the excess profits tax. A tax on corporation earnings
is a tax against the individual owners, in which the earnings
of the small investor with a small income are taxed at the
same rate as those of the investor with a large income. Scores
of thousands of small stockholders are victims of the inequity
of this double taxation. The earnings are first taxed in the
hands of the corporation at full, identical rates for all
stockholders, and then the portion of the earnings distributed
as dividends is taxed again, but this at progressive rates.
This double taxing is undoubtedly a powerful deterrent to
the flow of capital into enterprise.

There are other double taxes. A way will probably be found
to eliminate the duplication of income tax, in which the provinces
and municipalities as well as the Dominion have taken slices
from individual incomes. In the field of succession duties
there is not the same immediate expectation, because every
province has seemed determined to get all it can without consideration
of equity or final economic results. However, there is a hopeful
sign in the agreement recently concluded by Ontario and Quebec.
Dominion administration, with distribution among the provinces
of death duty taxation on some equitable basis, seems to be
the only reasonable way to eliminate double or triple taxation.
There is room for vast improvement, too, in the international
field. The taxes fairly and reasonably imposed by a single
country become an intolerable burden if they are piled upon
similar taxes which another country may levy on the same property
or income. In the field of succession duties or inheritance
taxes there can be complete chaos, because these may be imposed
by the country of domicile of the deceased, the country of
which he was resident, the country in which the property is
located, and the country in which the beneficiaries live,
and doubtless other countries could make out claims.

Probably no tax causes debate equal to the sales tax. By
some it is regarded as an unmitigated evil, while others think
that, because its incidence is so well hidden, it is a good
thing. The federal sales tax was introduced in 1920. It nearly
disappeared in 1930, when the rate dropped to 1 per cent,
but it was such a present aid in time of trouble that by 1936
it had climbed to the present 8 per cent, and in the last
fiscal year it yielded $339 million. On two counts, the sales
tax is unpopular: from the viewpoint of manufacturers, it
adds to the price and reduces sales, and from the viewpoint
of the consumer, it increases the cost of living. The federal
tax is concealed, so far as the consumer is concerned, but
from an administrative viewpoint it stands high. If, however,
there is virtue administratively in the cheapness of collection
and in the concealed nature of the effects of the sales tax
on the cost of living, these are the chief arguments against
it economically. Economists like to see in black and white
just where they are going, and what is the impact of taxes,
costs and profits. A recent United States opinion says there
is little justification for a federal sales tax, from a fiscal
and monetary standpoint. It generally tends to be deflationary,
and therefore harmful in periods of low consumer spending.
When inflation threatens, and deflationary pressure may be
needed, equally good results can be obtained by prompt adjustment
of income tax rates.

In addition to taxes for revenue, there are what might be
called punitive taxes, designed to direct public spending
into or away from certain fields, thus using the power of
taxation to attain other than fiscal ends. Of course, there
are clashes between the fiscal and the allegedly moral or
economic reasons. Insofar as taxation is used to reduce the
drinking of whiskey, attendance at horse races or the importing
of foreign goods, it fails to raise revenue. As a consequence,
unequal strains are forced upon other parts of the system.
There is room for honest difference of opinion, but many hold
the view that taxes are of little avail in reducing evils,
and that taxation primarily concerned with levelling incomes
and equalizing wealth is dishonest taxation. Socalled
luxury taxes serve but to perpetuate the superstition that
the salvation of the poor is through the persecution of the
rich, because in these days of highstandard living there
is no possible criterion by which "luxury" may be separated
from "necessity", depending upon the level of living attained.

It is expected that some workable reform will come out of
the study being made of the problem of succession duties.
As the law now is, people who have operated industries successfully
for many years are compelled to sacrifice their businesses
to prevent later forced liquidation to meet succession duties.
These taxes - succession duties, inheritance taxes, estate
taxes and death duties - have doubtless become a permanent
part of the taxation picture, because they offer governments
rich returns at little collection cost, they impose no hardships
on their former owners, now dead, and any hardships inflicted
upon the beneficiaries awaken little sympathy among the masses
who never expect to inherit anything. However, practical taxation
questions involve the incidence of the levies, the amounts
which are to be exempt, the effect on business and industry,
and the withdrawing for government projects of sums which
would otherwise make their way into the blood stream of enterprise.

Excise taxes on some goods are undoubtedly beneficial, or
at least relatively harmless in their impact upon the national
welfare. They provide an anchor to windward, deflationary
in character, which can be varied from budget to budget as
experience shows desirable after the effects of other tax
measures are evident.

Exemption from taxation becomes a bugbear to all governments.
It grows imperceptibly from small beginnings, perhaps good
in themselves. Then the base broadens, or the exempted properties
grove, until the revenuecollecting powers of the government
are seriously curtailed, and the tax share of the exempted
properties is spread over the rest of the economy. It is being
argued that there can be no sound reason for exempting from
taxation the property of any undertaking conducted for profit,
or of any public utility that supports itself out of its own
revenues. It is maintained by the Income Tax Payers' Association
that ordinary individuallyowned or partnership or corporate
business should not be expected to thrive and compete with
competitors who are incometax exempt. The same kind
of business may be carried on by a profitmaking corporation,
a cooperative and a publiclyowned enterprise,
in competition with one another in the same market. Hundreds
of enterprises, cooperatives, mutuals and publiclyowned
businesses, pay no taxes on their earnings, even in the crisis
of war, and many will emerge after the war with great surpluses
which will give them an enormous advantage over their taxpaying
competitors.

Government industrial corporations have appeared on the
scene in large numbers, presenting many municipalities with
new problems. These, and public utilities owned and operated
by public authorities, receive the same services as plants
which are privately owned; their employees and their families
also receive municipal services. If these persons were employed
in private enterprises the cost would be the same, but the
enterprises would pay their share. A few months ago the Montreal
Light, Heat and Power Consolidated was converted from a private
to a state enterprise. To make up the loss of revenue to the
federal treasury, a million Canadians in all parts of the
country would have to contribute six dollars each a year in
additional income tax.

The situation of the local taxpayer has become very acute
because of the narrowing of the base upon which real property
tax is levied, and the rising popular demand for new social
services. The first principle of Adam Smith, "Equality," would
seem to demand that taxation be evenly distributed over all
property of a similar kind, irrespective of ownership. But
during the past twenty years the total valuations for local
taxation have declined. According to the Annual Report of
the Assessors' Department there was property in the City of
Montreal totalling $1,269 million in 1943, of which $345 million
was exempt, a little over 25 per cent.

It is evident from this cursory survey of the tax field
that there is wide room for improvement. The two commissions
now at work represent only a start. Canada's taxation system
needs to be overhauled. This is the concensus of politicians
of all parties, economists, businessmen and ordinary taxpayers.
Improvement is necessary not only to remove intolerable injustices
but to prepare for the trying postwar period. The system
has grown up as the result of fiscal and political opportunism.
Canada must have a reasoned, coherent programme, designed
to adjust the revenue acts to new objectives, and set taxation
in the framework of fiscal and monetary policy designed to
provide the soundest basis for a peacetime economy. It is
merely a counsel of selfpreservation to say that there
should be the most careful and cooperative study by
taxpayers and experts to design a system that will collect
the state's revenue with the least possible discouragement
to the business enterprises that will be the backbone of postwar
employment and income.